Business Removing

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PROTECTING INVESTORS 55 national income, compared with 40%. South Africa has among the strongest protections for equity investors and a market capitalization rivaling Switzerland’s. Small investors in Yukos, the second largest Russian oil company, have been hurt by a lack of pre-emptive rights. Here is what happened. In 1999 Yukos, the majority shareholder of Tomskneft, voted to increase the number of Tomskneft shares by 300%. The new shares were sold to off-shore companies, allegedly owned by the controlling shareholder of Yukos, without informing existing Tomskneft shareholders. The ownership of existing small shareholders dropped from 49% to 9%, reducing the payoff to investors by four-fifths. This would have been impossible in the presence of pre-emptive rights in Russian company law. At least the investors were allowed to file a derivative suit, and actually did—in another 20% of countries even that would have been impossible, including in Bangladesh, Ecuador, Kuwait and Vietnam. Enforcement Good investor protections are the ones a country can enforce. Even the best rules are useless if enforcement is weak. Some economies—such as the Kyrgyz Republic, Moldova and Nigeria—adopted strong company or securities laws, but no cases of small investors’ abuse have ever been resolved in the courts. As in any other commercial dispute, the speed, cost, and fairness of the judgment determine whether small investors would use the courts and succeed in getting compensation. Potential expropriators know this as well and calculate the risk of being caught and punished. New Zealand and Norway, where courts perform well, see less abuse of investors (figure 7.6). Colombia improved enforcement in 2002 by giving arbitration tribunals the power to issue binding judgments. A decision of the tribunal typically takes 6 months. What to reform? Start with what’s simple. Increase disclosure. Then, make it easier for small investors to challenge attempts at expropriation in the courts. Enforce harsher penalties for managers or large investors who misbehave. And encourage investors to be active in identifying bad practices. It used to be that disclosing ownership and financial information cost a lot of money. Publishing a newspaper announcement every time shares change hands, and printing quarterly financial statements cost money. Printing annual reports and reaching every small investor cost even more. The internet has changed that. Now it is almost costless to disseminate information, once it has been assembled. 21 Many companies and stock exchanges are taking advantage of this. In Thailand the stock exchange publishes all ownership changes and quarterly statements on its website. Egypt increased the disclosure requirements last year and penalized about 100 companies that did not meet the higher standard. Chile required listed companies to publish quarterly financial reports and make them available electronically. Hungary passed a new Capital Markets Act, which introduces US-style disclosure of ownership and financial information. Brazil took a different path by establishing the Novo Mercado, with more stringent disclosure requirements. About 40 companies have already listed. 22 And in July 2004 the Indian government announced intentions to create a separate market for trading equity in smaller companies, with simpler disclosure requirements. This would allow the introduction of stricter disclosure for companies listed on the main market. Specialized commercial courts have been shown to improve the enforcement of debt contracts and speed up bankruptcy proceedings. They are equally beneficial for small investors who want to challenge decisions by managers or boards of directors. Some countries, such as India, channel shareholder suits into special tribunals, avoiding the delays in regular courts. Much like bankruptcy, corporate governance issues require more expertise so it pays for judges to be specialized in commercial cases. And even without specialization, cutting the procedures, time and cost to go through the regular courts will help. Disclosure requirements work only if they are backed by sufficient penalties and enforcement. Often, penalties are negligible. Two examples. In Indonesia the penalty for missing the deadline for submitting an annual report to the securities market regulator is $120. This is nothing for most companies. Not surprisingly, more than a third usually miss the deadline. 23 In Bulgaria penalties were increased in a 2003 reform, but their enforcement is woeful. An estimated 6% of the value of fines is paid. The remainder is challenged in the courts, taking years to resolve. 24 Reforms in other countries show that disclosure improves with stronger penalties. Mexico has increased compliance. In 1999, 30 of its 180 companies did not meet disclosure requirements. A dozen were penalized.
56 DOING BUSINESS IN 2005 In 2003 only 3 companies delayed their disclosure. South Africa recently implemented similar regulation that enables the stock exchange to suspend trading in companies that neglect disclosure. Again, the number of delinquents has dropped. No matter how good the disclosure, the legal protections, and the enforcement channels that government provides, they will amount to nothing unless someone uses them. Enter the institutional investors. The California’s Public Employees’ Retirement System (CalPERS), with $162 billion in assets, is the most active. Every year CalPERS publishes its assessment of investor protections in emerging markets. This year its analysis shows that India, Israel, Korea and Poland have the strongest investor protections. Egypt, Jordan, Turkey and Venezuela have the weakest. Using such rankings, CalPERS only invests in countries with good protection. 25 TIAA-CREF, the second largest pension fund in the United States, and Franklin Templeton, a large mutual fund, are also active in promoting disclosure and better corporate governance. Others should follow. These large players, because of their financial clout, influence not only individual companies but also regulators, putting them in the best position to lobby for change. Why reform? The more corporate governance scandals are reported, the better. It means expropriators are getting caught. And that small investors can take comfort in being protected by disclosure laws and shareholder rights. If the rights of investors are not protected, having majority ownership in a business is the only way to eliminate expropriation. A majority investor has access to all the company documents and prevails in business decisions. But few entrepreneurs would agree to have their business controlled by someone else. Those who do have less incentive to work hard, as the payoffs from success accumulate to someone else. The result: entrepreneurship is suppressed and fewer profitable investment projects are undertaken. A recent study of private equity transactions finds this exact pattern: Both the entrepreneur and investors lose out. In countries with higher risk of expropriation, the size of investments is half that in countries with good investor protections. Two deals take place for every 3 deals in countries that protect investors. And in the risky countries investors acquire majority stakes, limiting their opportunity for diversification. 26 This pattern also holds down the size of stock markets. When small investors see high expropriation risk, they do not invest. The market stays underdeveloped, with low trading volume (figure 7.7). 27 Instead, they may put their money in the banking sector, invest in real estate, or transfer it abroad. Either way, it does not reach profitable businesses in need of long-term financing. Better disclosure can change this. The United States securities legislation of 1933–34 increased financial disclosure and made auditors liable for mistakes—resulting in a significantly larger number of listings. 28 Today, if Russia were to adopt the more stringent disclosure regulations of Thailand, analysis suggests that its stock market capitalization would increase by up to 60%, and the volume of trades by 40%. 29 FIGURE 7.7 More disclosure, more access to equity markets and more turnover Perceived access to equity Turnover of stocks traded High High Low Low Least disclosure Most disclosure Countries ranked by disclosure index, quintiles Note: Analysis controls for income per capita. Relationships are significant at the 1% level. Source: Doing <strong>Business</strong> database, WEF (2004), World Bank (2004a). Least disclosure Most disclosure Countries ranked by disclosure index, quintiles
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Doing Business in 2005 Removing Obs
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Contents Doing Business in 2005 is
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2 DOING BUSINESS IN 2005 FIGURE 1.1
Page 9 and 10: 4 DOING BUSINESS IN 2005 FIGURE 1.4
Page 11 and 12: 6 DOING BUSINESS IN 2005 TABLE 1.3
Page 13 and 14: 8 DOING BUSINESS IN 2005 Notes 1. P
Page 15 and 16: 10 DOING BUSINESS IN 2005 eration w
Page 17 and 18: 12 DOING BUSINESS IN 2005 Based on
Page 19 and 20: 14 DOING BUSINESS IN 2005 FIGURE 2.
Page 22 and 23: 17 Starting a business Who is refor
Page 24 and 25: STARTING A BUSINESS 19 BOX 3.1 Who
Page 26 and 27: FIGURE 3.4 “More difficult” can
Page 28 and 29: STARTING A BUSINESS 23 Introduce te
Page 30 and 31: HIRING AND FIRING WORKERS 25 Hiring
Page 32 and 33: HIRING AND FIRING WORKERS 27 TABLE
Page 34 and 35: HIRING AND FIRING WORKERS 29 FIGURE
Page 36 and 37: HIRING AND FIRING WORKERS 31 FIGURE
Page 38 and 39: 33 Registering property Who makes r
Page 40 and 41: REGISTERING PROPERTY 35 BOX 5.1 Who
Page 42 and 43: REGISTERING PROPERTY 37 FIGURE 5.4
Page 44 and 45: REGISTERING PROPERTY 39 Others are
Page 46 and 47: 41 Getting credit Who is increasing
Page 48 and 49: GETTING CREDIT 43 TABLE 6.1 Coverag
Page 50 and 51: GETTING CREDIT 45 ment only takes t
Page 52 and 53: GETTING CREDIT 47 losing possession
Page 54 and 55: 49 Protecting investors Who uses eq
Page 56 and 57: PROTECTING INVESTORS 51 FIGURE 7.1
Page 58 and 59: PROTECTING INVESTORS 53 FIGURE 7.4
Page 62: PROTECTING INVESTORS 57 With langui
Page 67 and 68: 62 DOING BUSINESS IN 2005 In Lithua
Page 71 and 72: 66 DOING BUSINESS IN 2005 enforceme
Page 73 and 74: 68 DOING BUSINESS IN 2005 tion and
Page 75 and 76: 70 DOING BUSINESS IN 2005 Japan hav
Page 77 and 78: 72 DOING BUSINESS IN 2005 Provide s
Page 80 and 81: 75 References Acemoglu, Daron. 2003
Page 82 and 83: REFERENCES 77 ———. forthcomin
Page 84 and 85: 79 Data notes Economy characteristi
Page 86 and 87: DATA NOTES 81 Cost measure The text
Page 88 and 89: DATA NOTES 83 Assumptions about the
Page 90 and 91: DATA NOTES 85 such as government or
Page 92: DATA NOTES 87 Assumptions about the
Page 95 and 96: 90 DOING BUSINESS IN 2005 Starting
Page 97 and 98: 92 DOING BUSINESS IN 2005 Registeri
Page 99 and 100: 94 DOING BUSINESS IN 2005 Registeri
Page 101 and 102: 96 DOING BUSINESS IN 2005 Protectin
Page 103 and 104: 98 DOING BUSINESS IN 2005 ALBANIA G
Page 105 and 106: 100 DOING BUSINESS IN 2005 BANGLADE
Page 107 and 108: 102 DOING BUSINESS IN 2005 BRAZIL G
Page 109 and 110: 104 DOING BUSINESS IN 2005 CHAD GNI
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106 DOING BUSINESS IN 2005 CROATIA
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108 DOING BUSINESS IN 2005 ETHIOPIA
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110 DOING BUSINESS IN 2005 GUINEA G
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112 DOING BUSINESS IN 2005 IRELAND
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114 DOING BUSINESS IN 2005 KOREA, R
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116 DOING BUSINESS IN 2005 MACEDONI
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118 DOING BUSINESS IN 2005 MONGOLIA
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120 DOING BUSINESS IN 2005 NIGER GN
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122 DOING BUSINESS IN 2005 PERU GNI
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124 DOING BUSINESS IN 2005 SAUDI AR
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126 DOING BUSINESS IN 2005 SPAIN GN
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128 DOING BUSINESS IN 2005 TOGO GNI
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130 DOING BUSINESS IN 2005 URUGUAY
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ACKNOWLEDGMENTS 133 Acknowledgments
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ACKNOWLEDGMENTS 135 Angela Zaffalon
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ACKNOWLEDGMENTS 137 Nolan Stringfie
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ACKNOWLEDGMENTS 139 Thomas Bang LVP
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ACKNOWLEDGMENTS 141 Günter Schneid
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ACKNOWLEDGMENTS 143 Gavin Doherty E
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ACKNOWLEDGMENTS 145 Indrikis Liepa
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ACKNOWLEDGMENTS 147 Phillip Mwangal
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ACKNOWLEDGMENTS 149 Nestor Espenill
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ACKNOWLEDGMENTS 151 Beng Hong Ong W
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ACKNOWLEDGMENTS 153 Leopold Thomas
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ACKNOWLEDGMENTS 155 Marcela Hughes
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